CHICAGO – Harvey, Illinois, and its pension funds are working to finalize a settlement that would free up some state-intercepted revenues for the fiscally distressed city while satisfying the funds’ demands for overdue contributions.

A court hearing scheduled Thursday before Cook County Circuit Court Judge Raymond Mitchell on a preliminary injunction involving the status of $2.3 million intercepted by state Comptroller Susana Mendoza was moved to Tuesday.

Bob Fioretti of law firm Roth Fioretti LLC ia former Alderman in the Chicago City Council.
“We are working to satisfy the statutory pension requirements by 2040 and meet the needs of the city.” said Harvey’s attorney, Bob Fioretti of Roth Fioretti LLC.

“Hopefully, we are there,” said Harvey’s attorney, Bob Fioretti of Roth Fioretti LLC. “We are working to satisfy the statutory pension requirements by 2040 and meet the needs of the city.”

Fioretti cautioned that the deal was far from final and the city has seen previous settlements it thought were on firm ground fall apart. The percentages each would receive from the pot of about $7 million in state collected city revenues also could change.

The police fund has agreed to the latest settlement version and the firefighters’ fund board was slated to consider it by the end of the week so it could be presented to the judge Tuesday.

Firefighters' fund attorney Andrew Schwartz, of Schwartz & Kanyock LLC, confirmed the fund was working on a settlement but declined any further comment. The police fund’s lawyer, Michael Moirano, of Moirano Gorman Kenny LLC, did not respond to a request for comment.

The fiscally distressed city had been seeking to keep at least 75% of its funds to cover payroll and critical services but the latest settlement version requires the city to give up more. “The city is tightening its budget” to address the higher amount it would forgo, Fioretti said.

The Harvey fund diversions are the first to take place under a 2011 public safety pension funding law that allows for “state funds” to be intercepted to pay overdue actuarially based contributions to pension funds. The police fund was the first to file to cover a $7 million judgment and firefighters soon after filed requesting payment on a $12 million judgment.

The city challenged the police fund’s certified diversion request. Mendoza concluded her review last week of the city’s protest, finding that the police fund was eligible to receive the city’s share of state sales taxes and other funds. The office has concluded it has no discretion under the law to divvy up the revenue between the pension funds or the city.

The judge granted a temporary restraining order last week blocking the comptroller’s distribution of the $2.3 million to the police fund. The court did free up the city’s share of home rule sales taxes after the comptroller’s concluded they don’t count as “state funds.”

Those funds had previously been going directly to the trustee -- Amalgamated Bank of Chicago -- on $6 million of city revenue bonds along with the city’s share of state sales taxes. State sales taxes are now subject to interception, but the freed-up home rule revenue should be sufficient to cover about $600,000 in annual debt service.

The settlement is complicated by conflicts between the police and firefighter funds. The police fund was the first to submit an official claim and has argued it should receive priority status. The firefighters' fund argues it should share in the funds. The individual boards are also divided among retiree members and working members who have divergent interests.

Mitchell has made clear during recent hearings of his preference for a settlement and the comptroller’s office, which is represented by Attorney General Lisa Madigan, hopes also for a settlement or guidance on how to manage claims.

Market participants are watching closely to see how the Harvey case plays out because it raises short- and long-term questions. Rating agencies have warned a flood of other pension funds could follow the Harvey funds’ lead and there are several hundred that have been shorted by their government sponsors.

The intercept also has sparked worries that bondholders’ legal claims will fall behind pensioners and could lead to impairment as distressed governments look for ways to preserve funding for critical services.

Moody’s Investors Service warned this week in a report that certification of the police fund’s diversion represented a credit negative for all of the state’s local governments as it further reinforces the idea that holders of Illinois local government bonds fall behind pension funds.

If a settlement is finalized, Harvey’s lawsuit challenging the legality of the diversion of funds will be dropped so questions over the law’s enforcement and priority status won’t be settled unless there is another challenge. Harvey’s lawsuit argues that critical services and bondholders have a superior claim to the pension judgments and its revenues can’t be diverted to cover judgments.

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